The past few years have been crazy for the stock market. The volatility has gotten out of hand at times, and at other times, it has been a steady climb higher. The funny thing about that is the fundamentals haven't really changed all that much. The US is still climbing out of a deep Recession, and Europe is still trying to salvage the Euro and keep Greece in the fold.
The one thing that has changed is that there is no longer an air of crisis. There may be untold millions of people unemployed, but, eh, so what? The official statistics are getting a little better. Greece may be unable to ever repay its debts, but, well, who really cares? It's only about as important economically to Europe as some of the larger counties in a Northeast State.
It is the air of acceptance that is the most striking thing. The market is discounting all the negatives and pinning its hopes on continued improvement. That might happen, but there are all sorts of dangers, too. But the market is ignoring those.
Overall, 2012 is looking uncannily like 2011. Just like last year, we are having a good run higher early in the year. Perhaps the fact that this is an election year will keep spirits high into the fall, unlike 2011, and I'm sure that is what The Powers That Be would like. However, if that fragile veneer of recovery cracks, it is just as likely that, once again, we see a market top sometime around the mid-year point and a destructive collapse in the markets as people rush to lock in those ephemeral profits.
My own view is that the most important economic indicator is not employment, or inflation, or GDP. It is a very simple thing that affects everyone: the cost of a gallon of gasoline. If that continues rising, as predicted, to well over $4/gallon, it is very difficult to see this recovery continuing without some serious issues. Looking back at similar occurences, a spike in gasoline prices invariably results in a Recession (1973, 1979, 2008). I am not saying that is an inevitable outcome, but I am keeping a close eye on that as a fundamental leading economic indicator.
There are a couple of caveats to that. With all the fracking going on and the rise in the use of natural gas, the price of gasoline may not be quite the be-all-and-end-all that it once was. Also, all the money being relentlessly pumped into the system with QE this and that may be wrecking the foundations of the economy in the long run, but in the short run it could prop things up, at least through the elections in November. So, there are no sure things here. I'm just pointing out the dangers of being lulled into a false sense of complacency about the economy and where it is headed.
A nice investment balance, I think, can be found in some of the oil, gas and related plays such as UNG, XOM, RIG and the like. One of the stocks I have been playing that has surged over the past month, DRYS, is a stealth drilling play. Day rates for drillers are going through the roof with the huge activity going on between Africa and South America. DRYS has the added bonus of benefiting from an improving shipping sector (if that turns out to be the case). It's pretty clear that the drybulk sector can't get much weaker, and I like plays like that, where all the bad is known and things on balance should improve.
So, I am on my guard this year, though I have been playing the rally like everyone else. You have to play the trend or you will get burned, and the trend right now is up. But once it reaches some kind of tipping point, be it 1400 or 1500 or wherever, this market has the potential to roll over in a major way.
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